Dun & Bradstreet Stock Has Become Attractive (NYSE:DNB)

Dun & Bradstreet (NYSE:DNB) has shed 36% this year, mostly due to the ongoing bear market of the broad market, which has resulted from the surge of inflation to a 40-year high and the increasing risk of an upcoming recession. However, the company enjoys a wide business moat and has promising growth prospects ahead. Given also its cheap valuation, the stock has become attractive.

Business overview

Dun & Bradstreet is the greatest source of commercial data, analytics and insight on businesses in the world. When a company wants to determine the creditworthiness of its customers, it usually resorts to the immense database of Dun & Bradstreet. This database, which contains more than 500 million business records, is by far the largest in the world and helps numerous companies around the globe to take important decisions every day. Thanks to the unparalleled scale of its database, Dun & Bradstreet enjoys a wide business moat, as it is nearly impossible for potential competitors to develop such a large database from scratch.

The ongoing bear market of the S&P 500 has been caused primarily by the surge of inflation to a 40-year high. Inflation has greatly increased the operating costs of most companies and thus it has caused their operating margins to shrink. In addition, high inflation has taken its toll on consumer spending. These effects of inflation have formed strong headwinds for most companies.

Dun & Bradstreet is highly resilient to these headwinds. To be sure, it generates approximately 95% of its revenues from recurring sources thanks to the multi-year contracts it has with its customers. When a customer initiates cooperation with Dun & Bradstreet, it gets used to utilizing its immense database and thus it does not make sense to terminate the cooperation. This helps explain the exceptionally high portion of recurring revenues that Dun & Bradstreet enjoys.

In the third quarter, Dun & Bradstreet grew its revenue by 3% and its currency-neutral revenue by 7% while its EBITDA margin returned to 40%. The company posted flat earnings per share of $0.29, a decent performance given the challenging business environment. It is also worth noting that Dun & Bradstreet has missed the analysts’ earnings-per-share estimates only once in the last 10 quarters. This is a testament to the solid business performance of the company.

It is also important to note that Dun & Bradstreet partly benefits from the challenging economic environment, which has resulted from excessive inflation and the aggressive interest rate hikes implemented by the Fed. Due to this environment, many companies are utilizing the data and analytics provided by Dun & Bradstreet in an effort to take the right decisions and reduce their risks. Not only does Dun & Bradstreet provide data for the financial condition of numerous companies, but it also provides data for supply chain risks. Thanks to the high value of the data of Dun & Bradstreet, its Risk division has grown its sales at a double-digit rate for seven consecutive quarters.

Growth prospects

The primary growth driver of Dun & Bradstreet is its Risk business, as a growing number of companies is trying to take advantage of the unparalleled database of the financial data provider in order to take the right decisions related to its customers, suppliers and borrowers. This segment enjoys strong business momentum, with seven consecutive quarters of double-digit growth.

Moreover, Dun & Bradstreet does not rest on its laurels. Instead, it continuously tries to develop new products. It has made a partnership with Climate Change, a partner of Google, in an effort to create new climate risk products and enhance its ESG solutions. It is also remarkable that Dun & Bradstreet provides ESG data, not only for public companies, but also for private companies. It thus offers a unique proposition for companies that are trying to evaluate the ESG footprint of their suppliers and customers.

Given the fast-growing focus of companies, regulatory authorities and investors on the ESG footprint of almost every company, the ESG solutions of Dun & Bradstreet are likely to prove significant growth drivers in the upcoming years. Even better, as this trend is only in its early phases, the ESG solutions of Dun & Bradstreet are likely to grow the revenues of the company for several years.

As mentioned earlier, the ongoing bear market has partly been caused by the increasing risk of an imminent recession. Fortunately for the shareholders of Dun & Bradstreet, the company is somewhat resilient to recessions, as many companies resort to Dun & Bradstreet during rough economic periods in order to minimize their potential losses due to liquidity issues of their customers.

Valuation

Dun & Bradstreet is expected by analysts to earn $1.12 per share this year. As there is only one quarter left and the company has a great record of exceeding the analysts’ consensus, it is safe to assume that the company will post earnings per share of about $1.12 (or more) this year. This means that the stock is currently trading at a price-to-earnings ratio of 11.7.

Moreover, thanks to the aforementioned growth drivers, analysts expect Dun & Bradstreet to grow its earnings per share by 6.4% per year on average over the next three years, from $1.12 to $1.35. In other words, the stock is trading at only 9.7 times its expected earnings in 2025. This is a remarkably cheap valuation level, especially given the wide business moat of the company and its promising growth prospects.

The cheap valuation has resulted primarily from the negative market sentiment surrounding the broad stock market due to the sky-high level of inflation and the risk of an upcoming recession. In addition, high inflation exerts great pressure on the valuation of most stocks, as it significantly reduces the present value of their future cash flows.

The Fed has clearly stated that its primary goal is to restore inflation to its long-term target of 2%. To this end, it has adopted an exceptionally aggressive rate-hiking policy and hence it will almost certainly achieve its goal in the upcoming years. As soon as inflation begins to subside significantly, the market will probably reward Dun & Bradstreet with a more reasonable price-to-earnings ratio, most likely around 15. Therefore, the stock is likely to highly reward patient investors.

Final thoughts

Dun & Bradstreet has a relatively boring business model and thus it passes under the radar of most investors. However, the company has a wide business moat and hence investors should have this stock on their radar. In addition, the ongoing economic downturn provides a great opportunity to purchase this high-quality stock at an attractive price. As soon as inflation begins to subside, the stock is likely to appreciate significantly off its current cheap valuation level.